Competitive Strategy Management - Avon 91453

QGM6163- CSM- PROJECT PAPER - DEVELOPING AVON PRODUCTS INC. IN A GLOBAL PERSPECTIVE

AVON PRODUCTS INC. - DEVELOPING IN A GLOBAL PERSPECTIVE Avon Products, Inc. is the world‟s largest direct selling organization and merchandiser of beauty and beauty related products. From corporate offices in New York City, Avon marketed product lines to women in 112 countries through 1.6 million independent sales representatives who sold primarily on a “door-to-door” basis. Total sales in 1992 were $3.8 billion. The company work force of 29,900 employees staffed divisions of product management, manufacturing, and sales and service, worldwide. Avon entered the international marketplace in the 1950s. In 1954, Avon opened sales offices in Venezuela and Puerto Rico to cultivate the Latin American market. Avon expanded into the European market in 1957 through its United Kingdom subsidiary, Avon Cosmetics, Ltd. The company entered the Asian market in 1969, by way of Japan. In 1990, it became the first major cosmetics company to manufacture and sell products in China. That same year, Avon became the first American beauty company to enter East . Sales of Avon International, in 1992, were $2.25 billion, compared to Avon U.S. sales of $1.41 billion. More than three-fifths of the firm‟s direct selling sales and earnings came from outside the United States and the proportion was growing. Internationally, the company‟s product line was marketed primarily at moderate price points. The marketing strategy emphasized department store quality at discount store prices. Avon divided the world into four geographical divisions: The United States, Europe, The Pacific, and The Americas. In most of international markets, the primary operating arrangement in each of these divisions was direct ownership by Avon of the foreign country subsidiary. t ventures with foreign firms were used when the culture and the ways of doing business were significantly unfamiliar to Avon management. By 1991, Avon management felt that it was time to re-evaluate and map out the longterm future of the firm‟s beauty businesses on a global level. Senior management knew that the traditional Avon system of door-to-door house calls worked “wonderfully” in developing nations.

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Avon then tried to develop its own global perspective. In developing the market globally, Avon Management identifies three avenues of growth which are geographic growth, leveraging distribution channels in emerging and developing markets, and marketing in developed industrial areas. The first area was geographic growth. Enormous growth opportunities existed in countries with huge populations such as China, Indonesia and India. In Eastern Europe, management was excited about the potential in Poland, Czechoslovakia, and Hungary. In the Pacific Rim area, countries like Vietnam, Cambodia, and Laos were targeted as market opportunities. The second area of growth was to continue to emphasize direct selling in the emerging and developing markets of Latin America, the Pacific Rim, and other areas. In those markets, the retail infrastructure was undeveloped, especially in the interiors of those countries. The Avon representative provided consumers with an opportunity to buy a wide range of quality products at acceptable prices. In some developing markets, where access to quality goods was particularly prized, Avon‟s direct selling method opened up unprecedented prospects for women. The third area of international growth was marketing in the United States and other developed industrial areas like Canada, Western Europe, and Australia. New programs were designed to complement the existing network of sales representatives and image-enhancing advertising and promotion programs worldwide to make customers aware of Avon products and the purchase options available such as on the website and retail outlets. Avon‟s strong presence in the market globally intends to satisfy their customer demand around the world and shows that Avon has step into the market in a global perspective and vary from country to country and market to market internationally. This helps Avon in developing its own image in a global perspective and in achieving their mission of being the Global Beauty Leader.


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AVON PRODUCTS INC. Introduction David H. McConnell founded “The California Perfume Company (C) in 1886 with the first office located in New York. In 1906 the San Francisco earthquake destroyed C‟s California office however, before long the company reopened. C‟s first office outside United State was opened in 1914 in Montreal, Canada. In the 1920‟s C sales doubled to $2 million during this time there were more than 25,000 representatives in the United States. The Company‟s name was change to Avon Products Inc. after the British town Stratford-upon-Avon in 1938. Avon‟s sales increased to about $16 million and in 1946 the company was announced publicly with advertising campaign such as “Avon Calling”. Avon expanded overseas to countries such as Puerto Rico, Cuba and Venezuela. In the 1970‟s U.S sales top $750 millions and the first Avon Asian business was opened in Japan. Avon also acquired the Jeweler Tiffany‟s during this period of growth. It was the first major U.S. cosmetics manufacturer to permanently end animal testing. Avon adopted five core values which are Trust, Respect, Belief, Humility and Integrity which are evident in the mission statement to be a Global Beauty Leader, women‟s choice of buying, premier direct seller, the best place to work, largest women foundation and the most ired company. Avon success lies within it channel of distribution, it is the world‟s largest direct seller with 5.4 million Avon representatives in over 100 countries. Additionally, it is the largest micro lender to women and it among the world top global brands. The company increased it‟s investment in 2007 by over $120 million which aided in the development of new sales leadership opportunity, improved training, technology tools and changes in commission structure. There are three product categories which Avon distributes, they are beauty, fashion and home. In 2008, Avon changed its marketing approach of concentrating mostly on a homey image and is now including celebrities as a part of their promotions. The company advertising cost increased from $136 million in 2005 to $249 million in 2006 and $368 million in 2007. Reese Witherspoon is the Avon Foundation first global ambassador and honorary chairwoman who


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appear in ment for Avon make up, skin care products and fragrances. “Spotlight” the new fragrance was launched in 2009 with celebrity Courtenay Cox as the face of the brand. Avon‟s largest manufacturing plants, Brazil, China and Poland received the ISO 14001 certifications in 2008. Various awards were granted during this period such as the Clean Industry Certificate to the manufacturing plant in Mexico. During the same period Avon‟s revenues increased 7.5 percent and net income increased by 65 percent. Avon Products Inc. closest competitors are Revlon, Inc and Mary Kay Inc. Mary Kay Inc uses the same approach as Avon which is direct marketing approach which Revlon sells its products through cosmetics counters in department stores are pharmacies. Avon revenues far exceed that of its competitors in 2008 Avon‟s revenue was $10.37 billion compared to Mary Kay $2.40 billion and Revlon $1.35 billion. Avon implemented reconstructing programs in 2009 which included closing two manufacturing facilities. In addition, there is heavy investment in online search engines and internet carrier sites to help increase Avon‟s revenue. Andrea Jung is the Chief Executive Office who is leading the management team of thirteen to achieve its goal. Vision Statement (Actual) To be the company that best understands and satisfies the product, service, and self-fulfillment needs of women globally. Mission Statement (Actual) • The Global Beauty Leader - Avon build a unique portfolio of Beauty and related brands, striving to sur their competitors in quality, innovation and value, and elevating the image to become the Beauty company most women turn to worldwide. • The Women’s Choice for Buying - Avon become the destination store for women, offering the convenience of multiple brands and channels, and providing a personal high touch shopping experience that helps create lifelong customer relationships. • The Premier Direct Seller - Avon expand the presence in direct selling and lead the reinvention of the channel, offering an entrepreneurial opportunity that delivers superior earnings, NOR NAZERANAH OMAR DIN KL101003

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recognition, service and , making it easy and rewarding to be d with Avon and elevating the image of beauty industry. • The Best Place to Work - Avon is known for leadership edge, through the ion for high standards, respect for diversity and commitment to create exceptional opportunities for professional growth so that associates can fulfill their highest potential. • The Largest Women’s Foundation - Avon committed a global champion for the health and well-being of women through philanthropic efforts that eliminate breast cancer from the face of the earth, and that empower women to achieve economic independence. • The Most ired Company – Avon deliver superior returns to their shareholders by tirelessly pursuing new growth opportunities while continually improving their profitability, a socially responsible, ethical company that is watched and emulated as a model of success. The five values of Avon are: Trust, respect, belief, humility, and integrity. Slogan (Actual) Avon is “the company for women” Proposed Vision Statement To be the leading provider of home, fashion and beauty products that will satisfy customers while preserving the environment. Proposed Mission Statement Avon is committed to being the leading global provider of home, fashion and beauty products that will enhance the lives of customers. Avon will utilize latest technology and will pursue new growth opportunities that will bring about wealth for all stakeholders. At Avon they firmly believe in respect: respect for people and respect for the environment. Proposed Slogan “Avon: the company for everyone – committed to the enrichment of lives”


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Analysis: The vision statement was improved to include “customers” instead of women, since the company is now offering products for women, men and children. Additionally, in light of the fact that the world is going green, it was prudent to include the environment to emphasize the responsibility to society as we all work towards a sustainable future. The proposed mission statement incorporates all nine components that are essential to a good mission statement. The essential elements are customers, products and service, markets, technology, concern for survival, growth and profitability, philosophy, self-concept, concern for public image, and concern for employees. The „proposed mission statement also speaks to the company‟s core values of trust, respect, belief, humility, and integrity. The old slogan for Avon states “the company for women” we have decided to change this slogan to “Avon: the company for everyone – committed to the enrichment of lives INTERNAL ASSESSMENT Financial Ratios Analysis Ratio

2008

2009

2010

Current Ratio

0.75

1.15

1.22

Quick Ratio

1.1

0.93

0.88

Operating Profit Margin

0.09

0.09

1.25

Net Profit Margin

0.05

0.05

0.08

Return on Stockholders Equity

0.60

0.75

1.29

Total Asset Turnover

1.67

1.73

1.76

Debt / Equity Ratio

5.62%

7.03%

7.99%

Earnings Per Share

2.60

2.87

4.72

Avon Product Inc. Current ratios have increased from 2008 to 20010 which states that they may not face complications in liquidating its assets, if needed in the short – term. Profitability ratios have seen an increase which is a clear indication that Avon Products Inc. is much more well in of profitability in 2010 than in previous years. Additionally, more operating income means NOR NAZERANAH OMAR DIN KL101003

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that more projects can be undertaken which is in synchronization with strategic management processes. Total Asset Turnover ratio has steadily increased over the period which shows that the business is generating sufficient volume for the size of its asset investment. Debt/equity ratio has increased from in 2010 compared to 2008 and 2009 which indicates that Avon Products Inc holds much more financial leverage in of debt and equity financing. Marketing Positioning Map and Analysis

Customer Service (High) 

Avon  

Revlon

Mary Kay

Quality (Low)

Quality (High)

Customer Service (Low)

Analysis: The top-to-bottom approach was used to narrow down two important variables, customer service and quality of products. The key feature of a market positioning map is that only key or immediate competitors should be plotted. The competitors of Avon, Revlon and Mary Kay are well-established firms with Revlon plotted with higher quality products (Cosmetics). Avon was strategically plotted to show that they lead in customer service. However, when compared to cosmetics quality Revlon and Mary Kay are leading far away from Avon. Superior customer service compared to rivals Avon has gained an outstanding reputation as the best direct seller of beauty products. Through the continued efforts and achievements of its Sales Representatives Avon is now known


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worldwide. Avon's core competence has mainly been through direct selling, knowing this Jung and the management team implemented a Sales Leadership program in its ten largest markets and provided these markets with incentives to acquire, train, motivate, and retain the number of active Sales Representatives it needs to sustain significant growth. Analysis of Marketing Strategies Superior Customer Service Avon has gained an outstanding reputation as the best direct seller of beauty products. Through the continued efforts and achievements of its Sales Representatives Avon is now known worldwide. Avon also has a Representative development program that focuses on the professional training of Representatives, which enables them to provide valuable information on Avon brand products. Avon also keeps its superior customer service in other ways of distribution such as the Internet and in the department store sales by having a timely and correct order delivery, one on one information exchange and sincere professional advice and service in department sales. Wider Geographic Coverage Avon's management team decided to achieve growth in revenue by expanding its customer base into international markets, while continuing to compete based on their reputation as the leading direct seller of beauty products. Avon brand products are now recognized all over the world due to the success of their international campaign.

The company is in great position to take

advantage on growth in new global markets because of the demand for quality products. Avon now has operations in 50 different countries outside of the United States, and continues to reach new markets. Quicker Design-to-Market Times The ability to develop and release new products more quickly than rivals will give Avon the first mover advantage and further associate the name with quality and innovation and hopefully increase the company's market share in the CFT industry. Product innovation will continue to be a key factor of sales growth in the future. New product lines such as "Avon Wellness" and


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"Becoming" and the most recent "Anew" will attract new consumers, which will also help to increase revenue growth. More Attractive Product Line Avon's history as a beauty product distribution only enhances their credibility as a company and quality beauty product distributor. With Avon's ability in research and development they will be able to develop more new products and introduce them to the Avon product line more quickly than rivals. New products with the symbol of Avon quality and state-of-the-art technology will only increase brand image and hopefully sales while acquiring a more loyal customer base by establishing and providing a more attractive product line. Improved E-Commerce and Internet Sales Capabilities Avon's executives realized the company needed a more efficient method to communicate with its independent sales force, because current newsletters and brochures were not keeping up with the demands of the sales force. The Internet brings instant global reach, with thousands of products and prices that can be updated constantly at any time. Stronger Brand Name than Rivals Again Avon's history is a big player here because it gives the company credibility and name recognition. Avon continues to strengthen its image of core beauty products and international brand product line. In the past few years the company has made several upgrades in imaging and formulations, packaging, and customer service and the accuracy and speed of order delivery have also been improved. Avon's development of quality global brands gave them a chance to deliver a consistent beauty image around the world, as well as improve relationships with suppliers and become familiar with the most efficient way to get foreign sales. Stronger Global Distribution and Sales Capabilities Avon's ability to produce and distribute products in multiple countries enables them to have a significant amount of international sales. Avon continues to drive their products into new markets and have always been looking for ways in which they can improve their distribution channels.


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Map Locating Avon Operations in Worldwide Avon Products, Inc. markets its products to women in over 100 countries through over 5 million independent Avon Sales Representatives. This is one of their strategies in developing Avon in a global perspective. The map below shows the six geographic regions where Avon products are marketed and sold.

•

Albania

• Armenia

•

Belarus

• Bulgaria

•

Czech Republic

• Estonia

•

Finland

• Georgia

•

Hungary

• Kazakhstan

•

Kyrgyzstan

• Latvia

•

Lithuania

• Macedonia

•

Moldova

• Montenegro

•

Poland

• Romania


• United States

• Canada

• Puerto Rico

• Dominican Republic

• Aruba

• Antigua & Bahamas

• Barbados

• Bermuda

• Curacao

• Dominica

• Grand Cayman Island

•Grenada

•Guyana

•Jamaica

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• Argentina

• Bolivia

• Brazil

• Chile

•

Australia

•

Hong Kong

• Colombia

• Costa Rica

•

India

•

Japan

• Ecuador

• El Salvador

•

Malaysia

•

New Zealand

• Guatemala

• Honduras

•

Philippines

•

South Korea

• Mexico

• Nicaragua

•

Taiwan

•

Thailand

• Panama

• Paraguay

•

Vietnam

• Peru

• Uruguay

• Venezuela

•

Botswana

•

Cyprus

•

Dubai

•

Egypt

•

•

•

Greece

•

Iceland

•

Israel

•

Italy

•

Jordan

•

Kuwait

•

Lebanon

•

Lesotho

•

Luxembourg

•

Malta

•

Mauritius

•

Mozambique

•

Morocco

•

Namibia

•

Netherlands

•

North Cyprus

•

Norway

•

Oman

•

Portugal

•

Reunion Island


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Internal Assessment: Avon Strengths 1.

Avon is a Global Market Leader

2.

Committed and dedicated workforce - 5.4 million Avon representatives in over 100 countries making Avon the largest sales force.

3.

World‟s Largest Micro lender for women - extending some $1 billion in product and credit each year to help women start their own entrepreneurial businesses

4.

Channel of distribution – world‟s largest direct seller

5.

Manufacturing operations match ISO 14001 standards

6.

Avon owns its major manufacturing and distribution centers

7.

Increased in revenue in most geographic area, improve e –commerce and sales capabilities.(Revenues increased 7.5% from year 2008 to 2009)

8.

Avon is one of the world‟s top global brands. Avon has major brand names such as Anew, skin-so-soft, Avon Color etc with 90% recognition worldwide.

9.

First cosmetic to permanently end to animal testing

Internal Assessment: Avon Weaknesses 1.

Decrease in North American Sales Revenue by 129.4 million

2.

Weak Brand Image

3.

High advertising costs – Companies advertising spending went from $136 millions in 2005 to $249 million in 2008 to $368 million in 2009 and 14% higher in 2010

4.

Poor brand loyalty and Does not target urban trendsetters

6.

Beauty Sales in the first quarter 2009 were 12% lower compared to sales revenue in previous year 2010

7.

Avon lagged behind seven of their cosmetic companies in customer loyalty


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Internal Factor Evaluation (IFE) Matrix Key Internal Factors

Weights

Rating

Weighted Score

Strengths 1. Global Market Leaders 2. Committed and dedicated workforce - 5.4 million Avon representative in over 100 countries 3. Revenues increased 7.5% from year 2008 to 2009 4. Channel of distribution – world‟s largest direct seller

0.09

4

0.36

0.08

3

0.24

0.06 0.05

4 4

0.24 0.2

0.05

3

0.15

0.06

3

0.18

0.06

3

0.18

0.08

4

0.32

0.08

3

0.24

0.07

4

0.28

0.06

1

0.06

0.05

2

0.1

0.03

2

0.06

0.05

2

0.1

0.09

2

0.18

0.04

2

0.08

5. Award winning company worldwide 6. World‟s Largest Micro lender for women 7. World‟s top global brands – 90% recognition worldwide 8. Excellent promotional strategies 9. Manufacturing operations match ISO 14001 standards 10. Announced permanent ending to animal testing Weaknesses 1. Brand Image 2. High advertising costs 3. Misleads representatives 4. Avon seems like a commodity 5. Avon lagged behind seven of their cosmetic companies in customer loyalty 6. Revenue decreased in North America by 129.4 million

Total 1.00 Ratings: 1- major weakness, 2-minor weakness, 3-minor strength, 4-major strength

2.97

Analysis: The overall weighted score of Avon Products Internal factor Analysis (IFE) is 2.97 which indicated that the internal functions and roles are strong at Avon Products Inc.


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EXTERNAL ASSESMENTS Avon Major Competitors Mary Kay and Revlon are considered two major competitors of Avon Products Inc. in the cosmetics industry. Avon Product Inc. is seven and half times larger than Revlon and approximately eight times larger than Mary Kay. Although the majority of Avon's competitors distribute their products to resellers such as department stores, drugstores, or cosmetic stores, Avon sells its products solely through its direct-selling channel of independently-contracted Active Sales Representatives and through its online website. In contrast to Revlon‟s marketing strategy of selling through cosmetic counters in department stores and pharmacies, Mary Kay rivals with Avon Inc. as they both use direct marketing approach. In 1983 Mary Kay Cosmetics was founded in Dallas, Texas, by Mary Kay (now Mary Kay Ash). This company is known for providing women with exceptional opportunities for professional achievement and economic success and rewarding women for their success. In 2009 sales of Mary Kay products reached $2.6 billion in wholesale worldwide. There are more than 37,000 women across the world who has become Independent Sales Directors. Mary Kay spends millions of dollars and conducts more than 300,000 tests to ensure that Mary Kay products meet the highest standards of quality, safety and performance. Mary Kay products are expensive versus Avon which is comparable to store products. Mary Kay seems to be targeting older women while Avon is branching out to attract women of all ages with quality affordable makeup, jewelry, shoes, purses and children‟s items. Mary Kay has stayed in touch with the internet age; each independent beauty consultant can buy his or her own website to sell clients over the internet. In fact 90% of the company‟s revenue is now generated through online orders. Avon‟s revenues far exceed both major competitors. Their revenue is almost four and half times that of Mary Kay‟s and seven and half times Revlon‟s. Avon‟s revenue exceeds Ten Billion Dollars (B$10).


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Revlon was founded in 1932, by Charles Revson and his brother Joseph, along with a chemist, Charles Lachman, who contributed the "L" in the Revlon name. In the 1990's, Revlon revitalized its cosmetics business and strengthened its industry leadership role. Revlon Sales to Wal-Mart s for 23% of the company's total sales. The company earned $1.3 billion in sales and $950K in net income in 2009. Net sales fell 3.7% to $1.29 billion. Sales in the US fell 4.4% while sales international fell by 2.9%. The company attributes the loss to the weak global economy. The net sales in 2009 were approximately $1.3 billion, a decrease of approximately $51 million or 3.8% versus 2008. Revlon has a more focused product offering than some companies and when one considers only color cosmetics sales they are much more comparable. Revlon is the second largest color cosmetics company in the United States. Competitors Estee Lauder and Avon get the majority of their revenue outside the United States. Major Competitors Pie Chart

Sales, Revlon, 1.295, 9%

Sales, Mary Kay, 2.6, 18% Sales, Avon, 10.382, 73%

Analysis: From the pie chat above, it shows the overall sales for Avon and its major competitors in 2009. Avon gains $10.83 billion, follow by Mary Kay $ 2.6 billion and Revlon $1.3billion. NOR NAZERANAH OMAR DIN KL101003

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PEST Analysis Political Factors

Economic Factors

•

Tax policies

•

Economic growth

•

Employment laws

•

Interest rates

•

Trade restrictions and tariffs

•

Exchange rates

•

Political stability

•

Fluctuation in oil and gas prices

Social Factors

Technology Factors

•

Emphasis on safety

•

Automation

•

No animal testing

•

Technology incentives

•

Green Environment

•

Rate of technological change

•

Philanthropic Issues

•

Technologies Adaption

Analysis: Based on the PEST analysis of Avon Products, the company looks into the specific issues that relates and drives them in penetration in the international market and grows globally. External Assessment: Avon Opportunities 1.

A growing trend in the cosmetics industry is the introduction of “green” products. More than sixteen percent of beauty products launched in 2008 were certified organic, ethical, or all natural.

2.

Eye makeup market

3.

The cosmetics industry tends to be countercyclical. This means that those are industries for which the demand is either not correlated with the business cycle. The demand for their products is not much affected by availability of current income, but by other personal, social or economic factors. The recession also contributes to the industry being counter-cyclical. There is an upsurge in people ing the industry in the past six or eight months and there's absolutely no doubt that this is because of the recession and the effect on employment.


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4.

Aveda cosmetics found that sixty eight percent of consumers will remain loyal to a company that has a social and environmental commitment.

5.

Urban Trendsetters markets

6.

Geographic growth – enormous growth opportunities existed in countries with huge populations such as China, Indonesia and India.

7.

Demand for cosmetic products normally remains constant and unaffected by economic distress

8.

The baby boomers are aging and they are more conscious on their appearance, beauty and also improving their looks.

9.

Emphasize direct selling in emerging and developing markets

External Assessment: Avon Threats 1.

Competition such as Mary Kay and Revlon

2.

Rejection of internet selling by sales representative

3.

Global economic climate stifled new product development, innovation and sustainability programs in 2009.

4.

In of color cosmetics, environmental International Inc. predicted that many of these markets will see slowdown in volume demand.

5.

Inflation rate and Rising cost of commodities

7.

Direct-selling becoming more popular - Amid the financial crisis Aussie mums are increasingly turning to direct selling and at-home product parties to supplement their household income.

8.

They are a multilevel based company that sells inferior quality with a higher price tag than what it is worth.


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9.

Avon products outpaced by “jazzier” products to women who favored more exciting product lines

10.

Decreased earning opportunities

External Factor Evaluation (EFE) Matrix Critical Success Factors Key External Factors Opportunities 1. Organic (Green) Products

Weights

Rating

Weighted Score

0.09

4

0.36

2. Eye makeup market

0.07

3

0.21

3. Increase Internet Presence

0.08

4

0.32

4. Urban trendsetters market

0.09

4

0.39

5. Cosmetic industry tends to countercyclical

0.07

3

0.21

6. Geographic growth

0.09

4

0.36

7. Demand for cosmetic products normally remains constant and unaffected by economic distress Threats 1.Competitors

0.05

3

0.15

0.08

2

0.16

2. Rejection of Internet Selling by sales representative

0.07

3

0.21

3.Economic Downtown 0.09 2 0.18 4. Market Slowdown 0.08 3 0.24 5. Inflation Rate 0.07 3 0.21 6. Rising cost of commodities 0.07 2 0.14 Totals 1 3.14 Ratings: 1= the response is poor, 2= the response is average, 3= the response is superior, 4= response is superior Analysis: The table of external factors evaluation shows the opportunities that are available and factors that threaten the success of Avon in driving the business globally.


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Competitive Profile Matrix (M)

Critical Success Factors

Avon Revlon Mary Kay Weighted Weighted Weighted Weight Rating Score Rating Score Rating Score

Price competitiveness

0.10

3

0.30

4

0.40

2

0.20

Global Expansion Organizational Structure

0.09

3

0.27

4

0.36

2

0.18

0.04

2

0.08

4

0.16

3

0.12

Employee Morale

0.07

2

0.14

4

0.28

1

0.07

Technology

0.10

4

0.40

2

0.20

3

0.30

Product Safety

0.10

4

0.40

3

0.30

2

0.20

Customer Loyalty

0.10

2

0.20

4

0.40

3

0.30

Market Share

0.07

2

0.14

4

0.28

3

0.21

Advertising

0.10

2

0.20

4

0.40

1

0.10

Product Quality

0.10

2

0.20

3

0.30

1

0.10

Product Image

0.05

3

0.15

4

0.20

2

0.10

Financial Position

0.08

4

0.32

3

0.24

2

0.16

Total 1.00 2.80 3.52 Ratings: 1 – Poor, 2 – Average, 3 - Above Average, 4 – Superior

2.04

Analysis: The table above shows the Competitive Profile Matrix of various areas of the major competitors of Avon which is Revlon and Mary Kay. The table shows the competitive edge in the cosmetic industry. Leading by Revlon with a total of 3.52, followed by Avon in the second position with 2.80 and Mary Kay with 2.04. Avon has to improvise in certain factors such as employee morale and product image to take them further in the international markets to be a global player in the cosmetic industry. This can be achieved as Avon is financially strong and working on the Global Expansion Organization Structure with adaption of new technologies.


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SWOT Matrix

SWOT MATRIX

OPPORTUNITIES

STRENGTHS

WEAKNESSES

1. Global market leader 2. Largest sales force 3. World‟s largest micro lender to women 4. World‟s largest direct seller 5. ISO 14001 certification for largest manufacturing plants. 6. Avon owns its major manufacturing and distribution centers. 7. Increase in revenue in most geographic area due to increase in internet presence. 8. First cosmetic manufacturer to end animal testing.

1. Decrease in North American Sales Revenue. 2. Weak brand image 3. High advertising/budget costs 4. Poor brand loyalty 5. Does not target urban trendsetters. 6. Beauty sales in the first quarter 2009 were 12% lower compared to sales revenue in previous year 2008.

SO STRATEGIES

WO STRATEGIES

1. 2. 3. 4. 5.

Organic (Green) products 1. Increase sales by increasing 1. Increase awareness of Eye makeup market internet presence. (S7, O3) efforts to protect the Increase internet presence 2. Maximize on revenues in the environment. (W2, O1) Urban trendsetters market makeup market through 2. Increase market share by The cosmetic industry tends advertising and the sales positioning products to to countercyclical. force. (S2, O2) attract urban trendsetters 6. Demand for cosmetic 3. Manufacture and distribute (W5,O4) products normally remains more products that are ecoconstant and unaffected by friendly.(S6,S4,S2,O1) economic distress

THREATS

ST STRATEGIES

1. Competitors such as Mary Kay and Revlon 2. Rejection of internet selling by sales representatives 3. Economic downturn 4. Rising cost of commodities

1. Educate employees on the benefits of increasing internet presence. 2. Improve marketing strategies to new and existing customers by repositioning the brand, coupons, billboards, new packaging. (S4,S6,S7, T1, T3)


WT STRATEGIES 1. Discount products that are not earning substantial revenue and then faze them off the market in a timely manner. (W6,T3)

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Analysis: Based on the SWOT matrix table above, Avon have to improvise and realize that brand repositioning in the form of packaging is necessary, in order for Avon to create a stronger brand image and improve customer loyalty in international markets. Through an aggressive market penetration Avon will be able to increase revenue, further their strength and gain more competitive edge and increase profitability mostly in the North American region.

Strategic Position and Action Evaluation (SPACE) Matrix FS Y 6 5

Conservative

Aggressive

4 3 2 1 CA

IS -6

-5

-4

-3

-2

-1

1

2

3

4

5

6 X

-2 -3 -4 -5 Defensive

Competitive -6 ES

Strategic - aggressive (0.8)-y (1.20)x


Page 21


Internal Strategic Position

External Strategic Position

Financial Strength (FS)

Environmental Stability(ES)

Return on Investment

3

Competitive Pressure

-4

Leverage

2

Unemployment

-4

Liquidity

5

Technological Changes

-3

Working Capital

5

Barrier to Entry

-4

Cash Flow

5

Price elasticity of Demand

-1

ES Average

-3.20

FS Average

4

Competitive Advantage (CA)

Industry Strength (IS)

Market Share

-3 Growth Potential

5

Profit Potential

4

Product Quality

-3 Financial Stability

4

Customer Loyalty

-2

Productive Capacity Utilization

3

Control over Suppliers and Distributors

-3

Resource Utilization

2

Technological Know-How

-3

IS Average

3.60

CA Average

-2.80

Financial Strength + Competitive Advantage Y axis=FS (4) +ES (-3.2) = .08 X axis=CA (-2.8) +IS (3.6) =1.2 FS & IS +1(worst) to +6 (best) ES & CA -1(best) to -6(worst)


Page 22


Analysis: According to the diagram above Avon has a strong competitive position in the market with rapid growth. Avon is using their internal strengths to: (1)

Maximize on external opportunities

(2)

Minimize internal weaknesses

(3)

Avoid external threats Avon should improvise on their strategies of market penetration, improve research and

development to develop a full line of “green” products, reposition the brand in of packaging and forward integration. These are all attainable strategies that Avon have to proceed with in to the near future to be a global player in the cosmetic industry. Both the SPACE and SWOT matrix revealed possible strategies to implement in order to further grow our customer base create brand loyalty and further extends its competitive advantage and market leadership status. It also acts as a guide to the areas where more emphasis, financing and allocation of valuable resources is necessary. Allocation of resources and commitment by all stakeholders to the outlined objectives are pivotal keys to the success of Avon to be in the international market. While the SWOT and SPACE matrix identifies numerous strategies that Avon can implement in order to increase brand loyalty, product development and increase internet presence. To become a global player in the cosmetic industry, Avon should work on issues that relate to brand loyalty.


Page 23


The Quantitative Strategic Planning Matrix (QSPM)

Quantitative Strategic Planning Matrix (QSPM) for Avon Inc STRATEGIC ALTERNATIVES 1 2 3 Improved marketing strategies Improve Improve (packaging, R&D to employee coupons, introduce empowerment online bill more through regional boards, “green” training and discounts product development

Key External Factors

Weight

AS

0.16

1

0.09

TAS

AS

TAS

AS

TAS

0.16

4

.64

2

.32

4

.36

3

.27

3

.27

0.1

3

0.3

1

0.1

2

.20

0.05

3

0.15

3

0.15

2

0.1

0.1

3

0.3

3

0.3

3

0.3

0.11

3

0.33

2

0.22

1

0.1

1. Competitors

0.1

3

0.3

3

0.3

1

0.1

2. Economic downturn

0.1

2

.20

1

0.1

1

.1

0.09

―

―

―

―

―

―

0.1

2

0.20

1

0.10

3

0.20

Opportunities 1. Organic

(Green) products

2. Growth in e ye makeup

market

3. Increase internet presence 4. Urban

trendsetters market

5. The cosmetic industry tends to countercyclical 6. Demand for cosmetic products normally

remains constant and unaffected by economic distress Threats

3. Rising cost

of commodities 4. Rejection of internet selling by sales representatives SubTotal


1

2.30

2.18

1.69

Page 24


The Quantitative Strategic Planning Matrix (QSPM) for Avon Inc STRATEGIC ALTERNATIVES 1 2 3 Improved marketing Improve strategies Improve employee (packaging, R&D to empowerment coupons, introduce through online bill more regional boards, “green” training and discounts product development Key Internal Factors Strengths 1. Global

market leader

0.12

3

0.36

3

0.36

3

0.36

0.11

4

0.44

3

0.33

4

0.44

0.1

4

0.4

4

0.4

4

0.4

0.15

4

0.6

4

0.6

4

0.6

14001 certification for all manufacturing plants. 6. Avon owns its major manufacturing and distribution centers 7. Increased in revenue in most geographic area. Due to increase in internet presence.

0.05

3

0.15

3

0.15

3

0.15

0.06

4

0.24

4

0.24

3

0.18

0.05

4

0.2

3

0.15

4

0.2

First cosmetic manufacturer to end animal testing.

0.05

4

0.2

3

0.15

3

0.15

2.

Largest sales force

3.

World‟s largest micro lender to women

4. World‟s

largest direct seller

5. ISO

8.

Weaknesses

1.

Decrease in North American Revenue.

0.05

3

0.15

3

0.15

3

0.15

2.

Weak brand image

0.08

2

0.16

2

0.16

4

0.32

3. High advertising budget/ costs

0.05

―

―

―

4. Does not target urban trendsetters.

0.05

―

―

―

5. Poor brand loyalty 6. Beauty sales in the first quarter 2009 were 12% lower versus the prior year period.

0.05

4

0.03

―

Grand Total


1

0.2

3

0.15

― 5.40

4

0.2

― 4.87

4.69

Page 25


Analysis: Based on the analysis of the QSPM matrix it reveals that improved marketing strategies is the most attractive strategy along with improvement in research and development to introduce “green” products for Avon to reach the international markets in a global perspective. Avon has implemented some new strategies to overcome the existing strategies to boost up their level in the international markets to be the global player in the cosmetic industry. New Strategies 1)

To increase revenue total revenue by 10% all market segments- This will be achieved through improved marketing strategies (product placement, mail in discounts, coupons, online and bill boards ) to benefit both new and existing customers.

2)

To increase and further develop the “green” product line by 10% - this will be done through investment research and development in order to develop such products.

3)

To improve brand image and brand loyalty- Through repositioning the Avon brand in of product packaging to differentiate the product from being just being another commodity.

Existing Strategies 1)

Direct Selling/ Network Marketing

2)

Increase internet presence

3)

Employee Empowerment

Proposed Strategic Alternatives in the Quantitative Strategic Planning Matrix (QSPM) An improved market strategy (market penetration) This is an excellent way to boost sales and promote the brand. Avon is already the market leader and people are aware of the brand. However, to be a global player in the cosmetic industry, Avon has to go through more aggressive ment campaigns, sales promotions, mail-in NOR NAZERANAH OMAR DIN KL101003

Page 26


discounts/coupons, increase internet presence and bill boards. Avon will be able to further heighten brand awareness, build customer loyalty and create appeal for their products by new and existing customers. This is an important strategy for Avon to be in the international market to reach the global perspective. Avon looks to achieve this over the first two years with an estimated amount of 10 million dollars. With 5 million dedicated to further increase internet presence and the remaining 5 million to cover the other activities. Improve research and development to introduce more “green” products. This will be achieved through investment in research and development; to develop these ecofriendly products through means which are more environmentally friendly. The demand for “green” products appears to be a very viable market as consumers and distributors are becoming more conscious about protecting the environment. Thus creating a demand for these products, this also presents the opportunity to increase brand loyalty. This will be done over the next three years at an estimated cost of 10 million dollars. To improve brand image and brand loyalty Being that Avon lagged behind its major competitors in of brand loyalty; and the assertion by CEO of Brand Key Robert ikoff that Avon is not associated with anything and Avon seems to be more like a commodity. Avon has decided to reposition the brand in of packaging and labeling of Avon products. Avon seeks to make the Avon logo more pronounced on the products. It is believed that consumers will and be loyal to brands that they can be identified with. Avon will actively pursue this over the next three years at an estimated cost of 10 million dollars. To implement the proposed alternative strategies of Avon to be a global player in the cosmetics industry a total cost of $ 30 million is estimated. The three new alternatives of quantitative strategic planning matrix that has been proposed for Avon will develop a brand new image for Avon from the existing major competitors to compete through a competitive edge and strengthen their base to be a leader in the cosmetic industry in developing Avon in reaching the global perspective.


Page 27


FINANCING OPTIONS Based on the proposed alternatives given in the quantitative strategic planning matrix, the recommendations can be implanted on a phase basis over the next three years for Avon. The financing options that will be recommended for Avon for the next three years will be as below: EPS/EBIT Analysis for Avon Product Inc. Amount needed:

$30 million

Stock Price:

$31.90

Tax Rate:

35%

Interest rate:

5%

# of shares outstanding: $427.5 million

Common Stock Financing Recession EBIT

Normal

Boom

773.83

1018.2

1287.8

0

0

0

EBT

773.83

1018.2

1287.8

Taxes

249.17

327.86

414.67

EAT

524.66

690.30

873.13

428.4

428.4

428.4

1.22

1.61

2.04

Interest

# Shares EPS


Page 28


Debt Financing

Recession EBIT

Normal

Boom

773.83

1018.20

1287.8

1.5

1.5

1.5

EBT

772.33

1016.7

1286.3

Taxes

248.69

327.4

414.2

EAT

523.64

689.3

872.1

427.5

427.5

427.5

1.22

1.61

2.04

Interest

# Shares EPS

Combination Financing (Debt 30%/Stock 70%)

Recession EBIT

Normal

Boom

773.83

1018.2

1287.8

.45

.45

.45

EBT

773.4

1017.8

1287.4

Taxes

249.03

327.73

414.5

EAT

524.4

690

872.9

# Shares

428.1

428.1

428.1

1.22

1.61

2.04

Interest

EPS


Page 29


Combination Financing (Debt 70%/Stock 30%)

Recession EBIT

Normal

Boom

773.83

1018.2

1287.8

1.05

1.05

1.05

EBT

772.78

1017.1

1286.75

Taxes

248.84

327.5

414.3

EAT

523.9

689.6

872.5

# Shares

427.8

427.8

427.8

1.22

1.61

2.04

Interest

EPS

Analysis: Based on the four tables above, the common stock financing, debt financing, combination financing of debt and stock shows that Avon has chosen Equity for financing the business. This is because if recession continues and Avon does not make any profit they are not obligated to pay any dividends. With equity there is the existence of capital gains for Avon.

Avon Projected Financial Statement Below are the tables of Projected Financial Statement which is income statement and balance sheet statement made for Avon based on the financial options and recommendation of the strategic analysis that has been proposed for Avon through the quantitative strategic planning matrix for the next three years.


Page 30


AVON'S PROJECTED INCOME STATEMENT FOR 2010-2012 IN MILLIONS 2009

2010

2011

2012

10,284.70

11,313.17

12,444.49

13,688.94

98.10

113.17

124.45

136.90

10,382.80

11,426.27

12568.94

13,825.84

Cost of Revenue total

3,888.30

4,227.72

4,650.51

5,115.56

Gross Profit

6,396.40

7,198.55

7,918.43

8,710.28

5,389.80

5,347.50

5,907.40

6,433.80

66.70 -

71.70 -

74.70 -

76.70 -

Unusual Expense (Income) Other Operating Expenses, Total

561.00 -

21.71 -

23.90 -

26.27 -

Operating Income

1018.2

1,757.64

1,912.43

2,173.51

-

-

-

-

(7.10)

(9.00)

(8.00)

(7.40)

Income before Tax

926.50

1,058.80

1,131.20

1,244.30

Income tax total

298.30

297.00

260.40

170.40

Income after tax

628.90

761.80

870.80

1,073.90

Minority Interest Equity Interest US GAAP Adjustment

(2.40) 0 $0.00

(2.00) 0 $0.00

(2.00) $0.00

(1.60) -

Net Income before Extra. Items

625.8

759.8

868.80

1,072.30

0

0

-

-

625.8

759.8

868.80

1,072.30

Revenue Other revenue Total Total Revenue

Cost and Expenses Selling/General/istration/advertising Research and Development Depreciation/Amortization Interest Expense (Income)

Interest Income (Expense), Net Non Operating Gain (Loss) on Sale of assets Other Net

Total extraordinary items Net Income


Page 31


AVON'S PROJECTED BALANCE SHEET FOR 2010-2012 IN MILLIONS 2009

2010

2011

2012

ASSETS Cash and short term investment Total Receivables net Total Inventory Prepaid Expense Other Current Asset Total Current Asset

1338.4 1219.9 1067.5 122.8 440.7 4189.3

1356.4 1119.9 1174.25 120.5 443 4214.05

1364.44 1169.9 1291.68 110.7 390.7 4228.38

1368.4 1219.9 1420.85 122.8 440.7 4572.65

Property/Plant/Equipment total net Goodwill, net Intangible, Net Long term investment' Note Receivables-Long term Other Long Term Assets, total other Assets total Total Assets

1529.6 224.8 125.8 49.8 0 713.4 0 6832.7

1529.6 231.8 131.8 49.8 0 713.4 0 6870.45

1529.6 233.8 134.8 49.8 0 713.4 0 6889.78

1529.6 234.8 135.8 49.8 0 713.4 0 7236.05

LIABILITIES AND SHAREHOLDERS EQUITY s Payable Payable Accrued accrued Expenses Notes Payable/short term debt Capital Leases Other current liabilities total Total current liabilities

754.7 0 1247.3 0 138.1 134.7 2274.8

754.7 0 1247.3 0 138.1 241.9 2382

754.7 0 1247.3 0 138.1 358.88 2498.98

754.7 0 1247.3 0 138.1 488.05 2628.15

Total long term debt Deferred Income Tax Minority interest Other liabilities, total Total Liabilities

2307.8 173.8 40 763.7 5560.1

2357.8 173.8 40 713.7 5667.3

2360.8 173.8 40 710.7 5784.28

2360.8 173.8 40 710.7 5913.45

Redeemable Preferred stock Preferred stock - non redeemable, net Common Sock Additional Paid in capital Retained Earnings (Accumulated Deficit)

0 0 186.1 1941 4383.9

0 0 212.1 1941 4383.9

0 0 216.1 1941 4383.9

-4545.8 -692.6 1272.6

0 0 204.1 1941 4383.9 4587.45 -738.4 1203.15

-4733 -698.5 1105.5

-4525.8 -692.6 1322.6

6832.7

6870.45

6889.78

7236.05

Treasury - Common Other Equity Total Equity Total liabilities & Shareholders’ Equity


Page 32


Project Financial Ratios

Ratios

2010

2011

2012

1.84

1.8

1.7

1.3

1.2

1.2

Operating Profit Margin

0.15

0.15

0.16

Net Profit Margin

0.07

0.07

0.07

Return on Stockholders‟ Equity

0.63

0.79

0.81

Total Asset Turnover

1.66

1.82

1.91

4.7%

5.2%

4.5

3.7

4.1

5

Current Ratio Quick Ratio

Debt/Equity Ratio Earnings Per Share

Analysis: •

The current ratio and quick ratios show that Avon is in a good position to meet its short term obligations even without relying upon the sales of its inventories

•

The operating profit margin shows that Avon is improving in its efficiency which will result in greater profit productivity

•

The net profit margin shows that profitability will improve thus shareholders can expect greater return

•

The ROE shows that the return on equity is improving

•

The total asset turnover shows that the return on the asset investment is good

•

The Debt/Equity ratio shows that Avon is using more equity to finance operations

•

EPS shows that Avon is becoming more attractive to investors


Page 33


EVALUATION – BALANCE SCORE CARD Balance Score Card Balance Scorecard is the strategic planning and management system that provides a frame work for measuring performance and assisting managers identify what it is needs to be measured and completed, while enabling executives in the execution of these strategies constitutes the makeup of the balance scorecard for the business. There are four fundamental perspectives from which organizations using this system can implement their vision and strategies include: 1) Financial Performance Perspective This element is showing how viable a business appears to shareholders in order to achieve financial success. 2) Customer knowledge Perspective Highlights the importance of satisfying customers while focusing on the achievement of the organization‟s vision. 3) Internal Business Processes Perspective Refers to the internal aspects of the business, wherein managers can analyze the overall operations of the business to see how well the provision of its goods and services and its ultimate impact on achieving total customer satisfaction. 4) Learning and Growth Perspective Includes the training and continuous upgrading of employees knowledge, skills and abilities that necessitates the advancement of being technologically savvy. Avon Products Inc. uses the Balance Score Card system to implement the essential link between business-planning strategies and people plans for greater productivity. This is to ensure that Avon can achieve increase growth in revenue, increase market share, ensuring the delivery of quality and timely services, providing the appropriate training and development of employees, delivering improved services by linking business strategies to people plans.

Forecasting

customers need by anticipating changes and adopting various technologies is high demand on the priority list of the Avon to develop them as a cosmetic leader changing towards a global player in the cosmetics industry. NOR NAZERANAH OMAR DIN KL101003

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AVON BALANCE SCORE CARD EVALUATION

Objectives Financial To succeed financially, how we appear to our shareholders

Measure/Target

Time Expectation

Chief Financial Officer Lower customer acquisition costs. Double digit sales growth Increase market share for on-line products Target 10% return on investment. Achieve at least 10% on net profit in 1st year of new product

Shareholders value

Ensure on-time delivery always

Percentage of on- time delivery. Number of customers, email addresses, time duration between purchases Percentage on return Conversion rate

Continuous Growth in revenue Increase profitability Market share

Net profit on percentage sales

Customers How to achieve our vision, the importance of

satisfying our customers Internal Business To analyze operations and see how products and services achieve total shareholder and customer satisfaction, What business process must we excel at? Learning & Growth To achieve continuous training and upgrading of employees skills and abilities. Always keeping abreast of new technology Advancing change and selfimprovement

Primary Responsibility

Operations

Increase customer retention Reward customer loyalty

Continuous

Operations Supply chain excellence in order confirmation Adoption of some social services

Quick turnaround on the delivery of orders Incorporating and engaging quality, talented skills

Generating revenue

Operations - measures of quality, products and costs

Continuous

Human Resource Ensure managers are exposed to market changes

People - employee retention, training and skills Successful penetration of new markets

Online service innovation

Continuous improvement in CRM

Implement a succession plan

Increase value in Knowledge management system


Continuous

Page 35


Analysis: The main aim to evaluate Avon based on Balance Score Card is to enables Avon to meet their strategic objectives by identifying the various means of improving workforce productivity. This is an effective tool in maximizing Avon resources and building capacity in a structured and planned way. It helps Avon to improvise based on the performance measurement and key indicators which has been stated. The department officers are responsible in meeting the targets which leads to Avon‟s objectives. A continuous time expectation is needed to ensure that the structured and planned targets to be achieved. These plans not only look at the strategic and operational components for Avon to succeed, but also consider the people factor in developing and delivering Avon business in the international markets to be the global player in the cosmetics industry. AVON IN GLOBAL PERSPECTIVE Avon Being Global From a global perspective, three avenues of growth were identified by Avon management which are as below; 1.

Geographic Growth

2.

Leveraging distribution channels in emerging and developing markets

3.

Marketing in developed industrial areas.

The Global Product Management Group The new multinational Global Product Management Group was an essential factor in the new organization. The group would the entire company with “Centers of Excellence” to increase Avon‟s competitive advantage in the marketplace. With a global scope and multinational staffs, the centers would be located around the world, wherever the appropriate expertise existed. The Global Product Management group would be responsible for product management, global brands, global sourcing (raw materials) and logistics, worldwide manufacturing, product research and development and certain global aspects of sales and customer service . NOR NAZERANAH OMAR DIN KL101003

Page 36


The Global Planning And Development In addition to the above, the responsibilities of the Global Planning and Development group were expanded to include new business development. The group would manage Avon‟s emerging market ventures in China, Eastern Europe, Russia, and other parts of the former Soviet Union, as well as other new market ventures. Advantages Of A Global Organization The new slimmed-down global organization will make Avon more responsive to local markets while providing economies in such areas as global manufacturing, purchasing and research and development. Avon will also be able to better exchange best practices, growth initiatives and competitive information more rapidly from market to market and become the embodiment of the phrase, “Think global, act local.” The new market-oriented organization was expected to speed decision-making, eliminate unnecessary levels of management, allow sharing of successful business practices by previously autonomous divisions, and reduce overhead by centralizing such functions as purchasing and manufacturing. It would concentrate on discovering what buyers wanted in each individual market and provide consumers with products in a way that would enable Avon to achieve its long run growth objectives. Avon Global Direction Avon forces to engage the entire company in becoming more customer-oriented and more market driven. The task forces established the following targets to guide management in objective setting and strategy development: 1.

Improve consumer attitudes toward the attractiveness and accessibility of Avon and its products, and begin to develop a global image for the company;

2.

Improve the quality of the product line, in bringing new products to market and in weeding out weaker or inappropriate items;


Page 37


3.

Introduce global product planning and the extension of global sourcing (finding the most appropriate source of raw materials);

4.

Improve customer database management and market segmentation; and

5.

Establish new ways for customers to shop Avon, and improve in the speed at which customers and sales representatives could order and receive products.

Having implemented a regimen of operating strategies, financial controls, organizational changes, innovative leadership, and market-based targets over the past four years, Avon now favorably positioned to enjoy a period of growth. In a worldwide corporate climate of abrupt changes and discontinuities, of newly emerging forces and dangers, and of unforeseen influences at home and abroad, Avon‟s leadership could well ask the unanswered question, “Will the internal organizational and other changes that have been made reposition Avon so that it can compete successfully in the global marketplace. AVON STRATEGIC PROBLEMS, TRENDS & FORCES What to do about new product lines It would be a good idea for Avon to research into launching new products in different lines than they are currently in but keep them similar in the industry. In order to continue growing and obtain bigger cash flows and profits you have to spend before you get a payoff. With Avon's new research and development plant they should be able to quickly design and market new product lines without many problems. Having new product lines will help maintain growth and internal expansion. How to maintain growth Avon has been growing globally for decades to continue to do this Avon needs to be aware of what it will entail. They have taken care of research and development with their new facility but there are many other factors that could inhibit them. Reluctances to expand internally will hold them down as well as finances. Avon may have to look into selling totally new products, which is consistent with what was before mentioned.


Page 38


How to continue cutting costs Throughout Avon's business transformation they have done an incredible job cutting costs mostly thanks to Kropf. How to continue to cut costs may rise a problem because they have launched new cosmetics that are selling well, put millions into research and development, and do not want to upset loyal customers by retiring old products that have a loyal customer base. Some customers may be hooked on a classic product such as Skin-so-Soft and just happen to by other products every once in a while when they reorder their Skin-so-Soft. Cutting this product out of the line will not only result in a loss of sales due to the product but all other little buys that each customer may order in the process. Avon's business transformation may have to look elsewhere at every part of its value chain to try and cut out expensive virtually unneeded parts to try and cuts costs. Internal Expansion Some may say that there is no room for internal expansion because Avon has done such a good job in international markets and that it is not needed. I believe that the CFT market is so big that internal expansion within the company should be a must. I think Avon should continue to grow within and outside the United States, create more jobs and look into developing more new product lines in the men's shaving and baby care areas. Avon's strategy wants to diversify and penetrate new markets and what better way to do it than with new products. Developing alliances with department stores and more Internets selling will also help with internal expansion. Direct-Selling Model Dependent on Earnings from Active Sales Representatives In both domestic and global markets, Avon's sales largely come from direct selling through its Active Sales Representatives. The 6.2 million Representatives that Avon employs are independent contractors that receive a percentage commission for their sales but do not enjoy employee benefits. The idea behind the direct-selling model is that if Avon can eliminate the middle-man (department and cosmetic stores) and get its products directly to consumers, they will be able to cut costs and increase profits. One of the goals of the 2005 Turn-around Plan to increase the number of Representatives paid off in 2007 when the company had a 13% increase in net sales as a result of the increase in the number of Representatives. Due to its reliance on direct-selling through representatives, Avon not only competes for the end consumer but also for NOR NAZERANAH OMAR DIN KL101003

Page 39


representatives that are knowledgeable about the industry and about beauty products. Avon's dependence on the productivity and profitability of the representative direct-selling model exposes it to cost and litigation risks. In 2004, four Avon representatives filed a class action lawsuit against the company for alleged "channel stuffing," where Avon supposedly shipped products representatives without an order and held representatives responsible for payment for the unordered shipments. It is likely that AVP will incur future costs through litigation and resolution of the lawsuit, which may include that would increase costs and decrease profits for Avon. Multi-year Cost Restructuring Initiative May be Unable to Reduce Costs and Increased Advertising In late 2005, Avon launched a Turn-around plan that included several strategic initiatives to realign costs, improve products, and increase market share through brand competitiveness. Avon expects annualized savings of more than $430 million when the plan is fully implemented in 2011-2012. However, with the global economic downturn and slowing demand for non-essential personal care products, Avon may not be able to achieve its savings target. For example, Avon has dropped its prices so far that at the end of Q2 2009, 70% of its products were prices less than $5. Falling short of its savings targets would be detrimental to Avon's profitability as it would no longer be able to its increased advertising spending. In 2009, Avon decreased advertising costs by 10% which was in contrast to the 48% increase in 2007 and 83% increase in 2006 - a sign that the company was cutting back due to the economic downturn to new product launches and improve brand recognition as part of the turn-around plan. Although Avon does not want to reduce advertising spending, which means success of the turn-around plan is vital to ing Avon's increased advertising costs as well as costs incurred by the company's entry and expansion in new global markets, the economic downturn has forced the company to cut back on advertising. At the end of 2009, the company revised its turn-around plan and now hopes to save $200 by 2011-2012. Direct-Selling Business Model Exposed to Regulations in the Global Market Avon has become synonymous with the direct-selling business model - the process by which the company hires independent contractors, called Active Sales Representatives, and pays them


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percentage of commission to sell Avon products directly to customers. By removing the need for a middle distributor, such as a department or cosmetic store, Avon hopes to eliminate costs and increase profits. In 1998, the Chinese government banned direct-selling in response to abuses perpetrated by some corporations. The company's business in the region was crippled in the short-term and strongly disadvantaged in the long-term as the company was forced to abandon its direct-selling strategy and had to open its own retail stores in order to sell products. Not until 2006 did China re-licensed Avon for direct-selling, which allowed Avon's revenues from China to increase rapidly from 2006 to 2008. Total revenue from China rose from $212 million in 2006 to $353 million in 2009. Similar situations may arise in Avon's other emerging market segments, which would negatively impact Avon's revenue growth globally. Large Presence in Global Market Exposes Avon Products to Currency Fluctuation Risks 80% of Avon's sales revenues come from markets outside of the United States, making the company very sensitive to currency fluctuations and the strength of the dollar. A weakening of the dollar against foreign currencies would allow Avon products to become more competitively priced in global markets, thus positively affecting sales revenue from foreign markets; however, a weak dollar would also mean higher costs for products manufactured overseas. AVON KEY SUCCESS Key success factors concern the product attributes, competencies, competitive capabilities and market achievements with the greatest bearing on company profitability. These are the things that the company does well and helps them obtain profits. Ability to get new products out of R&D and into the market With all the money and time Avon has put into the Research and Development part of the company it has paid off. In 2002 Avon spent $100 million on a new state-of-the-art research and development facility. This provides researchers with the materials they need in an easy work environment, which in turn improves efficiency in every aspect of the process. Having this facility enables Avon to have their new products out in the market very quickly compared to other rivals such as Revlon and Estee Lauder. This skill gives Avon an image of superior technology and quality and provides them with the first mover advantage in many cases as well.


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Internet Capability It was only in the past decade that Avon became familiar with the Internet. When Jung took over she saw that e-commerce was on a fast rise and that Avon was not capitalizing on this sales opportunity. It was only a matter of time before Avon had their own website that now has all kinds of e-commerce activities. Avon's website enables customers to order products, read on the most recent developments by Avon, informs them of sales and clearances as well as free gift giveaways and the top ten selling items. Customers can shop by product or category and check on their status, review the most frequently asked questions or get assistance all at the click of a mouse. By making their web site easy to navigate and perform multiple tasks, Avon has helped reduce ordering costs and increase sales. Managerial Experience Andrea Jung, Avon's Chief Executive Officer, has been with Avon since 1994. Before working for Avon, she graduated from Princeton and ed Bloomingdales where she rose to second in command before the age of thirty. When she ed Avon she entered as the President of United States product marketing and continued to impress her upper management. Her bold decisions made her stand out and she was named CEO in 2001 at the age of forty. Susan Kropf who has been with Avon since the early 90's moved and Executive Lieutenant, to Executive Vice President and President of North American operations. Kropf has worked alongside Jung and was key in the Business Process Reengineering efforts that achieved great success in 2001, with savings of more than $150 million. The experience and success of Avon managers is unteachable, irreplaceable and are definitely a huge factor on why Avon is where it is today. Accurate Filling of Orders Only six years ago you would hear customers complain about the inaccuracy of Avon's mail orders. This is a rare complaint today. New training programs and the implementation of the Avon website has enable the company to fill orders fast and accurately. The days of human error with direct selling have almost become obsolete with the new initiatives taken place to eliminate such error. Incentives implemented by the sales leadership program have also made Avon give consistent quality service.


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CONCLUSION Avon management has re-evaluated and map out the long-term future of the firm‟s business to develop them in the international market and be a player in cosmetic industry on a global level. By Customizing Marketing Internationally based on geographical areas, Avon tries to satisfying the subtleties and intricacies of customer demand around the world meant that the firm‟s business would vary from country to country and market to market. To reach a wider target in the geographical area over the globe, Avon developed Avon Select, a direct marketing program, to enable customers to buy Avon products in various settings. Customers could order products via any one of four methods: through their Avon representative, by mail though special Select catalogs, by the 1-800-FOR-AVON telephone, or by FAX which were offered worldwide. This indicates that Avon is playing a major role as a cosmetic leader in a global perspective. Other than that, new programs were designed to complement the existing network of Avon sales representatives to reach a wider coverage in developing global direction. Avon spent 2 to 3 percent of annual sales on image-enhancing advertising and promotion programs worldwide to make customers aware of Avon products and the purchase options available. Even retail stores were not ruled out by management as a viable alternative for the distribution of Avon products. It was not easy for Avon in the process to develop a global organization. It affected the firm in a number of different ways. The product line was rationalized by strengthening and developing a certain number of global brands that were important and sold on a worldwide basis. Sourcing of raw materials and the logistics system took advantage of Avon‟s strong presence in many markets in of efficiencies in the supply chain. A changing environment which encouraged lower duty rates suggested that it was no longer necessary to manufacture products in the countries where they were sold. Underutilized manufacturing plants, from a capacity of view, could now be consolidated with others plants were also an affecting issue for Avon in being global. By implementing a regimen of operating strategies, financial controls, organizational changes, innovative leadership, and market-based targets has favorably positioned Avon to enjoy a period of growth in worldwide. The internal organizational and changes that have been made reposition Avon so that it can compete successfully as the “Cosmetic Leader in Global Marketplace” NOR NAZERANAH OMAR DIN KL101003

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REFERENCES 1.

David, Fred, R “Strategic Management Concepts and Cases” 12ed. Prentice Hall 2009

2.

Retrieved December 3, 2010 www.avon.com

3.

Retrieved December 3, 2010 www.wikinvest.com

4.

“Avon Calling – For Help” Business Month April, 2010.

5.

“Avon Calls – At 50 Times Earnings,” Business Month November, 2006 -2009.

6.

Avon Products, Inc., Annual Report, New York, N.Y., 2010

7.

Avon Products, Inc., Annual Report, New York, N.Y., 2009

8.

“How Avon Rings Their Chimes,” Sales and Marketing Management, November, 2009

9.

Avon Products, Inc.: DEVELOPING A GLOBAL PERSPECTIVE

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Retrieved December 2010 www.yahoo.com/images


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